Depending on the needs quite easily I would say. I still have one of the 1st gen nanos (2GB) and it serves me well in the gym and on runs. So what if I have to switch the music out every week or so to keep it fresh, some don't mind doing that for the savings.
Everyone has their personal, some like to have their entire library with them and some only like to carry what fits in a shuffle (which explains why Apple has all of these different products 😉 )
Limited production run... going by the delays we saw on the 16GB models, I would say Apple made a last-minute decision to double capacities from 4 and 8GB models to 8 and 16GB...